19 July 2011

Why Won’t Sprott Buy More Silver For PSLV and crash COMEX?

Update 25 July: I contacted Sprott Asset Management and they clarified that they could do a PSLV secondary at any time however the time lag for SEC clearance (possibly up to 45 days) of a new prospectus would allow traders to frontrun the placement. Once the one year public period has passed they would be able to do an overnight deal in which case there would be no frontrunning. Sprott Asset Management reiterated that they would not do a deal that would have a material impact on PSLV’s premium.

Update 20 July: I've been informed that Sprott can't do a shelf offering until his fund is one year old, which it won't be for many months yet and that Sprott said at the Vancouver Resource Conference that he would not do anything to hurt the resulting premium in the fund. That answers the question in my post title. I've left the rest of the post below as is. I'd still suggest that he consider structuring additional offerings in a way that would put some pressure on the market. Buying silver via forwards may not be best way to do it.

Kid Dynamite has come out all guns blazing in his latest post. His post goes into detail into a point I raised in my last post - why isn't Sprott doing secondary share issues for his silver fund?

He has a point. By not issuing more shares in the face of demand, all that happens is investors are paying $120 for $100 worth of silver. This means $20 worth of silver is NOT being bought and taken off the market, which takes pressure off the bullion banks.

The response that if he did a secondary that it would reduce the premium, hurting the existing investors, is valid. But the point is he shouldn't have allowed that situation to develop in the first place. [see update below] Now he is caught. By not wanting to hurt existing investors he is diverting silver demand AWAY from taking physical off the market INTO just bidding up the premium.

In any case, I would counter the "reduce premium" argument by suggesting that Sprott could do the secondary in a way as to probably cause no loss to existing holders. Consider that PSLV has 22.3 million ounces. A 20% premium suggests there is at least demand for 4.46 million ounces (20% of 22.3moz). I think most would agree, however, that he could do a secondary for double that given the profile and trustworthyness of his fund.

COMEX has registered stocks of 26.8moz. Consider if Sprott slowly bought 8.92moz of silver futures and then stood for delivery. That is ONE THIRD of the entire COMEX stock. What do you think that would do to the price of silver when Sprott and others assert that the physical market is currently so tight? Those that believe this would have to expect that you'd get a price increase that would easily cover any decrease in PSLV's premium.

And the argument that Sprott shouldn't do it because COMEX would cash settle does not hold water. Even if the cash settlement price is below the current "real" physical price, it would still probably be above his purchase price (as silver is in a bull market). In any case, if his actions were able to cause such a significant and high profile failure to deliver, then the resulting price move really would be "explosive", producing a profit on his existing silver holdings that would cover any loss (if any) on the cash settlement of his futures contracts, and benefitting existing PSLV holders to boot.

It is a win win: if COMEX delivers they take a huge hit to their stocks, if they don't, the price gets a huge hit to the upside. Personally I don't think it would play out this way. Bullion banks would source silver to deliver into the Sprott contract and thus maintain COMEX stocks. But that is just a theory. Until someone with the capability to make such a move does it, it is all talk, both on my side and theirs.

Why not simply offer existing shareholders detachable "rights" to buy the secondary issue at the secondary offer net value? This avoids the CEF typical screw-over wherein existing shareholders get their premium wiped out and can't even buy the new shares unless they are "lucky" enough to have a large account at one of the underwriters. A rights offer could either be exercised or sold on the market by existing shareholders. This method has been used foir centuries.

Eric or anyone else that wants to see silver break out of its manipulation will just buy incrementally at market. 3 billion Asians will take care of the mass buying of physical that will end the paper game.

Yes, but he also continues with the misinformation as well. Jesse may be good in some areas, but it has become clear to me he really doesn't have any first hand experience in the metals markets and just parrots the commonly accepted "facts" about the market.

also, re: Sprott's claim of potential frontrunning: amazing spin from the Master himself. First Sprott complains that a billion ounces of silver trade every day, and then he says that a 10mm ounces secondary over some unknown time period possibly within 45 days could be frontrun.